Association Fines: Back in the U.S.S.R.By Adam Atlas
ot since the glory days of the Soviet Union have I experienced something as backward as the procedures used for the imposition of card Association fines.
Make no mistake, though, the need for the fines and for a rule compliance mechanism is evident and beyond reproach. The rules are a fundamental and necessary part of the banking system's security.
But this column is not about the merits of the fines or rules; rather, it's about the Associations' peculiar procedures by which they impose the rules on participants in the industry.
For better or for worse, the highest "laws" of the land in merchant services are the Association rules. The difference between traditional laws, such as the U.S. Constitution, and the rules, is that the former are by and for the people, while the latter are by and for the member banks.
Banks deserve all due support. Let's face it: Directly or indirectly they write our paychecks. However, a close review of the procedures used for imposing rule violation fines reveals that they leave little room for participants that are not banks to contest rulings on rule violations.
The Associations have the opportunity to change the rules to take into consideration the "public good" in the merchant services industry. In other words, the fact that the Associations make the law means that they have at least an ethical, if not legal, obligation to make the law of our land fair.
Consider a recent example from one of my clients. A major national ISO levied a sub-ISO a $50,000 fine without any advance notice or any follow-up explanation.
The ISO imposed the fine because a rogue direct agent of the ISO (not an agent of the sub-ISO) had posted a Web site that was not in compliance with the Association rules.
In response, the Association imposed a $50,000 fine on one of its member banks; the bank passed the fine on to a major processor that passed it on to a national ISO that levied it, wrongly, on the sub-ISO and not the direct agent actually responsible for the violation.
The ISO mistook who was actually responsible for the violation. Rather than assigning the responsibility to its direct agent who was liable, the ISO decided that its sub-ISO was responsible.
Not only did the ISO make this mistake, but it gave no advance or subsequent notice or explanation to the sub-ISO whom it wrongly fined. When the sub-ISO complained to the national ISO, the sub-ISO was rebuffed. The sub-ISO, as you can well imagine, was baffled.
A neutral observer to this set of facts is bound to ask "Where in the rules is there a right of appeal by a wrongfully fined sub-ISO?" According to the Association, the member bank, the national processor and the national ISO, there isn't one.
Not only is there no right of appeal, but there is no access to much of the rules that would inform the fined party whether the fine was justified to begin with. Finally, with no advance or subsequent notice of the fine, the sub-ISO would not know how to contest it, even if a rule permitted such a contestation.
In a nutshell, ISOs, sub-ISOs and agents are forced to rely entirely on the scruples of the entity above them when it comes to dealing with an incoming fine from an Association.
Of course, there are remedies at law, such as claims in fraud, breach of contract or misappropriation of funds, but as we all know, the most effective law of the land in merchant services is the law made by the Associations. In addition, ordinary courts are often too costly for a small agent to use when the amount at issue is $50,000.
Wherever you are on the totem pole of participants in the merchant services industry, you have an interest in seeing the implementation of a transparent and fair system of dealing with rule violations and fines.
The rules, like any legal jurisdiction, need dispute settlement mechanisms. A step in the right direction would be a system of public notices on an Association Web site regarding infractions of the rules, complete with party names, supporting documentation and actual amounts of fines imposed at the various levels (Association to bank, bank to processor, processor to ISO and ISO to agent).
I do not intend this column to be a critique of the existence of the rules. On the contrary, participants in the industry would be more enthusiastic in adhering to the rules if there were some semblance of a justice system for their administration.
If the Associations need help in establishing an arbitration system for rule violation fines, I am pleased to offer my services to build that system for the benefit of all participants in the industry. My contact information is at the end of the column.
Card Associations are, perhaps, imagining a kind of management-labor divide between their members and the good ISOs that generate their business.
I propose they do away with this heavy-handed and marginally communist approach and move toward a team spirit perspective whereby they see ISOs as responsible participants in the merchant acquiring business worthy of due consideration when they fall outside the bounds of the rules.
Another part of the rules ripe for improvement is the Member Alert to Control High Risk Merchants (MATCH) list, a.k.a. terminated merchant file, but I will save this discussion for another column.
In the meantime, readers should consider lobbying their member banks to amend the rules to accommodate some of the real and legitimate interests of ISOs and agents. To my knowledge, nothing in the rules prevents member banks from being fair.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, e-mail Adam Atlas, Attorney at Law at atlas@adamatlas.com or call him at 514-842-0886.
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